Brexit, what Brexit?

August 24th, 2016

Brexit, what Brexit? Brexit, what Brexit? is a guest post by award winning freelance journalist Adam Lewis and will be of interest to private client investors. In the immediate aftermath of the UK’s shock decision to go it alone, you could be forgiven that the four horseman of the Apocalypse were ready to […]

Brexit, what Brexit?

Brexit, what Brexit? is a guest post by award winning freelance journalist Adam Lewis and will be of interest to private client investors.

In the immediate aftermath of the UK’s shock decision to go it alone, you could be forgiven that the four horseman of the Apocalypse were ready to reign down and sweep all before them when it came to both the UK economy and UK stock market.

Sterling collapsed, markets both at home and abroad plummeted and fund managers proclaimed how those who voted to leave had just created the very first “Do It Yourself” recession. It’s little wonder then that with all this negativity investors ran to the hilt, abandoning equity positions, buying up gold and rushing for the largest door possible when it came to commercial property.

“The FTSE 100 and 250 Indexes today stand at higher levels than they did pre-Brexit”

However as the dust continues to settle and the weeks that have passed by turn into months, the scorched landscape predicted by many (despite the political bloodbath that followed) doesn’t seem to have come to pass. The FTSE 100 and 250 Indexes today stand at higher levels than they did pre-Brexit, the latest employment figures show that more people continue to find jobs, while July’s retail sales showed that consumers are continuing to spend in the shops.

While the Bank of England has been quick to act and cut interest rates to further historic lows, some commentators are using the above evidence to suggest that the ill-effects of leaving the European Union were overdone and that the reality is that Britain will be fine after all. However is all of this just a little premature?

“The UK is embarking on a divorce the likes of which we have never been seen before”

The problem seems to be that some people seem to be forgetting that to all extent and purposes the UK remains part of the EU at present. As such, despite the stimulus that has followed and the more that its expected to come fiscally, the UK is embarking on a divorce the likes of which we have never been seen before.

In a recent interview with Jupiter’s Alastair Gunn, the co manager of the Distribution, Enhanced Distribution and High Income funds, suggested to me that given the complexity involved in leaving, the whole process could take a staggering five years. This could make life very tough for some UK businesses and he predicts that a shallow recession, lasting at least a couple of quarters remains on the horizon.

Gunn’s prediction of a shallow recession is in far contrast to the bearish scenario recently laid out by City Financial’s investment director Peter Toogood, who predicted the upcoming crisis markets are set to face will make 2008 look like a “picnic”. His argument is that with central banks continuing to pump money into economies to stimulate growth, a pattern of increasing debt and little evidence of financial stability could lead to the next financial crisis.

“Other managers have been adopting a wait and see attitude as to how things play out post-Brexit”

Jupiter’s Gunn has reacted by taking some risk off the table and adopting a slightly more defensive stance within his equity portfolios, while other managers have been adopting a wait and see attitude as to how things play out post-Brexit.

LGIM’s lead fund manager of multi-index Justin Onuekwusi, told me that one area he has been exploiting post-Brexit is those sectors of the market sensitive to interest rate moves, such as hard currency emerging market debt, global real estate securities and to some extent emerging market equities.

Another factor to bear in mind and a trend which has accelerated since Brexit, is how 2016 has proved a real challenge for active UK equity funds, with the average manager under-performing 5.5% the FTSE All-Share year-to-date. The reason for this has been the performance of the FTSE 100. Given the huge falls in the value of sterling it has significantly outperformed mid caps so far this year, returning 11% versus a 1% gain from the FTSE 250.

Onuekwusi warns: “Going forward, if sterling continues to weaken this trend of under-performance is likely to continue. This is likely to benefit an index strategy over active funds, which tend to be more concentrated in mega caps. The scale of which can be seen by the fact that year-to-date the FTSE 100 would be in the top decile of the IA UK All Companies sector.”

Investment Quorum’s own CIO Peter Lowman, told me that while markets reacted as he expected in the hours and days following Brexit, it is too early to say we are out of the woods.

“Our experience and knowledge has taught us not to panic in times like these and so we fully expected an overreaction in the markets immediately after Brexit followed by a period of recovery. Obviously, the immediate losers in the UK were the house builders, travel & leisure, banks, and the general retailers but with sterling falling to a 31-year low the multi-national companies rallied on the back of what is deemed to be future benefits from exports.”

“While markets reacted as he expected in the hours and days following Brexit, it is too early to say we are out of the woods”

“I do though think it’s premature to say the worst might be over given that we probably face many years of uncertainty, but it’s all about navigating your way around the Brexit, we cannot change what has happened but what we can do is benefit from the opportunities that it will undoubtedly throw up over the coming months and years.”

So it would seem after the initial pain of Brexit, we may be in somewhat of a temporary void in terms of market activity. Putting it in disaster movie terms, it feels like being in the serenity of the eye of the storm, the key will be just how brutal will the coming storm will be?

Adam Lewis is a freelance journalist and content director at Matrix Solutions

He has worked as a financial journalist for over 14 years, the last 10 of which were at Centaur where he lately edited Fund Strategy magazine for 3 years until February 2015. He has won five awards for journalism excellence, including AIC Trade Journalist of the Year (2002 and 2008) and IMA Specialist Reporter of the Year (2005).

Brexit, what Brexit? is a guest post and the views here do not necessarily concur with those of Investment Quorum. In fact, it is very often the case that we may be largely in disagreement but we respect the opinions of others and value their contribution to the wealth management debate. Guest posts may appeal more to some than others and may often have an industry, stock market or sector knowledge expectation.

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